EUR/USD Breaks 1 Year Low as CDS Rises again on European Debt Fear

By IBT Staff Reporter On 05/04/10 AT 5:45 PM

Euro drops sharply today and breaks through 1 year low of 1.3114 against dollar. In spite of the EUR 110b bailout packaged announced over the weekend, markets are still unconvinced that the fiscal debt crisis in Eurozone is solved. Investors are concerned that there are still a lot of obstacles ahead and there are still much risk of contagion spread. There are even rumors that Spain will be the next in line to apply for financial aids. CDS on Greece is back above 680 level today which implies over 40% probability of default over five years. CDS on Spain, Portugal, Ireland and Italy also rose back to above 180, 310, 200 and 140 respectively.

Commodity currencies are also weak. Aussie was dragged down by RBA statement that signaled a pause. RBA raised interest rate by 25bps to 4.50% but said that interest rates to borrows are now close to average. Markets take that as a signal of pause in near term, at least in June, with possibility of being on hold in July too depending on economic developments.

Talking about Aussie, today's weakness is rather broad based and apparent. AUD/NZD dived sharply and breaks 1.26 level as the fall from 1.3329 extends. And we'd expect more downside going forward towards 1.24 level in near term.

One more thing to note is that crude oil just failed recent high of 87 level and reversed. It looks like some more consolidations would be seen between 80 and 87 and that should be supportive to the greenback in near term.

Dollar index's strong break of 82.71 resistance today confirms that whole medium term rise from 74.19 has resumed. We'll stay bullish as long as 81.63 support holds and expect more rally to 61.8% retracement of 89.62 to 74.19 at 83.72 next.

On the data front, German retail sales dropped -2.4% mom, rose 2.7% yoy in March. UK PMI manufacturing rose more than expected to 58 in April but gives little support to Sterling. Eurozone PPI rose 0.6% mom, 0.9% yoy in March.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 1.0770; (P) 1.0829; (R1) 1.0915;

USD/CHF's strong break of 1.0923 resistance confirms that recent rally has resumed. Intraday bias remains on the upside and further rise should be seen to 100% projection of 1.0131 to 1.0897 from 1.0434 at 1.1200 next. On the downside, below 1.0887 minor support will turn intraday bias neutral and bring consolidations. But downside should be contained above 1.0748 support and bring rally resumption.

In the bigger picture, last week's break of 1.0897 affirm the case that medium term rise from 2009 low of 0.9916 is still in progress. Also, note that the sustained trading above medium term falling trend line allows affirm the view that whole correction from 1.2296 has completed with three waves down to 0.9916. We'll now stay bullish as long as 1.0434 support holds and expect the rise from 0.9916 to extend towards 1.1963/2296 resistance zone in medium term. However, break of 1.0434 support will mix up the outlook again.